What's my tax rate on a lump sum taken from my pension?
11 August 2017
Question by Judy
If I take a lump sum from my pension at age 55, what is the rate of tax after the first 25%?
Strap yourself in for some numbers!
The answer depends entirely on what other taxable income you receive or expect to receive in the tax year that you withdraw the funds.
The 75% is added to your existing income and will be tiered in the same way as any other income that is subject to income tax. So for example for the current tax year, the first £11,500 of your income is tax-free, the next £33,500 is taxed at 20%, the next £105,000 is taxed at 40%, and anything over £150,000 is taxed at 45%. If the taxable element (75%) of the pension withdrawal takes your taxable income over £100,000, you would also start losing your personal allowance of £11,500 (The personal allowance reduces by £1 for every £2 over £100,000 of earnings until you lose it entirely).
You need to be aware that the pension provider is likely to tax you on an emergency tax rate, which is too high. This would mean that you may have to reclaim tax you pay on the withdrawal. You can do this either by submitting a self-assessment tax return or through a form on the government website.
Be aware that by taking taxable income from your pension, you will limit your ability to save into it. Once you withdraw taxable income from a pension, the total amount you can save into that pension will drop to £4,000 per tax year. If you don't need to use the money you are withdrawing immediately, your provider may allow you to take the pension out in parts enabling you to spread the withdrawal over a number of tax years. If you are unsure and you want more specific advice based on your individual circumstances you can either seek help from a financial adviser or an accountant.
I hope this helps,